Attention: Pensions!

Alameda’s city manager has joined city managers across the East Bay in endorsing a white paper that lays out plans to reduce public employee pension benefits. The proposal seeks to reduce pension benefits for new public employees while asking existing public workers to pay more toward their own retirement.

Union City’s City Manager Larry Cheeves, who was part of the group that wrote the paper, said city managers across the East Bay will be asking their elected leaders to sign off on the plan and move forward to negotiate new pension deals with their workers. Alameda’s City Council is set to hear about the paper’s recommendations on April 20.

Implementation of the proposal, which the paper’s authors said was put forth in the face of escalating pension costs and inaction by state leaders and the state’s preeminent public employee retirement system, would require the consent of local public employee unions.

City officials are in the midst of negotiating new contracts with Alameda’s public safety unions, though they have taken steps to try to scale back retiree benefits, with much of the focus on reducing health benefits. Deputy City Manager Lisa Goldman said she couldn’t comment on ongoing contract negotiations.

Interim City Manager Ann Marie Gallant told the City Council last August that the dramatic losses suffered by the state’s primary pension program, CalPERS, in recent years could translate into the city paying as much as $5.5 million in additional benefit contributions as soon as 2011 in order to cover the cost of retirees’ pension benefits that CalPERS can’t.

For future savings, the white paper calls for new public safety workers to get 2 percent of their salary for each year worked if they retire at age 50, down from the current standard of 3 percent, and other new public employees to get 2 percent for each year they work if they retire at 60. Workers in each group would be entitled to more money if they retire later. The benefit would be calculated based on an average of the employee’s highest three years of salary, instead of their highest year, as it’s done now.

To help deal with the coming spike in retirement payouts, existing employees would be asked to contribute more of their own money to help cover the cost of their pensions.

One thing that wouldn’t change under the white paper’s recommendations is the type of plan public employees have. The paper’s authors said cities should keep the “defined benefit” plan most now use – instead of switching to the “defined contribution” plan (think 401k) that most private employers offer – because the former plan offers better returns, in the short term at least, will be cheaper for taxpayers.

The proposal was put forth on the heels of a similar effort in San Diego and other counties to rein in pension costs that spiked in the late 1990s and beyond, as CalPERS earned big returns and cities grew their public employee benefits in order to compete with their neighbors for workers. Under the 3 percent at 50 plan, for example, many public safety workers are able to retire with their full salaries money cities are increasingly unable to pay.

“These increased benefits have proven to be unsustainable and need to be rolled back to more appropriate pre-1999 levels,” the white paper says.

The paper’s authors said they are also hoping to head off ballot initiatives which, they said, could lead to a poorly-designed reform effort.

Cheeves said San Leandro has put a two-tier pension system in place and that his own council in Union City has authorized city staff there to try to negotiate a similar plan with their employee bargaining units.

If you’re interested, the white paper is below.

2 Comments »

The public sector needs to join the private sector in using 401Ks and IRAs. Under the system currently in place a manager in the public sector does not know the true cost of any job or operation until decades later because of the cost of retirement benefits that are accumulating. No manager can do a decent job of managing with such a long feedback loop. Even the lowliest gardener or janitor could potentially draw a million dollars in retirement and healthcare benefits. But it makes contracting out look very attractive because you can nail down the cost.

Two percent per year at age 50 is still a very rich benefit. With today’s average lifespans, this can mean that people spend more years in retirement than they do working. Why isn’t there a proposal to eliminate the defined benefit plan entirely for new employees and freeze it for existing employees? Those of us in the private sector, where smart employers realized about 15-20 years ago that defined benefit plans are fiscally unsustainable and eliminated them, can’t even imagine being able to afford retiring that young. Defined benefit plans depend on healthy investment returns to make the model work. They worked over the last half of the last century because the country was in an unprecedented economic boom. The party is over now, and at some point the government and companies covered by labor unions are going to need to switch to the defined contribution model like the rest of us. The only reason DB plans are still around is unions. At some point the unions are going to realize that if they want to keep jobs in the US, they’re going to have to be more realistic about retiree benefits.

Another improvement, if eliminating the DB plan entirely is not do-able, would be to change the benefit formula. Using the three highest years rather than one is a good step, but why not a cap such as Social Security has? That would address the spiking and the ridiculous impact of overtime on retirement benefits.

Someone also needs to take a hard look at retiree health benefits, which can add tens of thousands of dollars in annual cost per retiree. Because these costs are so unpredictable, there needs to be a cap on the value of these benefits, with retirees making up the difference.

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